*295 In Docket No. 53920, a decision will be entered that there is no deficiency for the year 1947, and that there is a deficiency in petitioner's income tax for the year 1948, in the sum of $ 892.55.
In Docket No. 53921, decision will be entered for respondent.
1. The first husband of petitioner Charlotte Leviton Herbert died testate in 1943. Said petitioner was sole legatee. The administration of decedent's estate was conducted with great informality. No entries indicate any action taken by the State court in which the estate was being administered during the taxable years (1947, 1948, and 1949). No final accounting was ever filed and the executor was never discharged. In 1948 the executor completed, for all practical purposes, the administration of the estate and obtained a general release from said petitioner. Held, administration of estate was completed in 1948, and net income reported by estate for 1948 and 1949 is properly includible in taxable income of said petitioner for said years.
2. In 1947 distributions were made by the estate to said petitioner in total amounts exceeding the net income reported by the estate. However, the decedent's will did not provide*296 for the distribution of the current income of the estate to the legatee; no request was made by the legatee for the distribution to her of the income of the estate nor was any such distribution authorized by the State court; the distributions made to her were charged by the executor against the principal of the estate; income taxes were paid by the executor on all of the net income of the estate; and the distributions made to the legatee were in amounts and at times bearing no relation to the income of the estate. Held, distributions made to said petitioner by estate in 1947 not taxable to her under section 162 (c), Internal Revenue Code of 1939.
3. Held, net income of estate for 1948 taxable to said petitioner should not be reduced by amortization of and/or loss on abandonment of certain leasehold interests owned by decedent at time of his death.
*807 In Docket No. 53920 respondent has determined deficiencies in income taxes against petitioner Charlotte Leviton Herbert for the years 1947 and 1948 in the respective amounts of $ 3,961.53 and $ 892.55. In Docket No. 53921 respondent has determined a deficiency in income tax against Jess Herbert and Charlotte Leviton Herbert for the year 1949 in the sum of $ 325.32. In all the years the deficiencies result from adjustments made by respondent to income of petitioner Charlotte Leviton Herbert who will hereinafter be referred to as petitioner.
Petitioner, who is now the wife of Jess Herbert, was the widow of one David Leviton. The deficiencies for the 3 years here involved *808 result from respondent's determination that petitioner received taxable distributions from Leviton's estate*298 in the years 1947, 1948, and 1949, in the respective amounts of $ 7,205.45, $ 1,911.15, and $ 1,087.02, which amounts represent the net income reported by the estate for those years in its fiduciary income tax returns.
The issues are (1) whether the income reported by the estate is taxable to petitioner under section 162 (b), Internal Revenue Code of 1939, because the period of the administration of the estate was completed before the end of 1947, pursuant to section 29.162-1, Regulations 111, (2) whether the income of the estate is taxable to petitioner under section 162 (c), Internal Revenue Code of 1939, and (3) whether the income of the estate for the years 1947 and 1948 should be reduced by the amortization of and loss on abandonment of certain leasehold interests owned by the decedent.
FINDINGS OF FACT.
The parties have filed a stipulation of certain facts. We find those facts to be as stipulated and incorporate herein by this reference the stipulation.
Petitioner, the widow of David Leviton and now the wife of Jess Herbert, lives in New York City. She filed individual Federal income tax returns for the years 1947 and 1948 with the collector of internal revenue for the third*299 district of New York, and filed a joint return with her husband, Jess Herbert, for the year 1949 with the same collector.
David Leviton, a resident of New York, died testate on April 15, 1943. His will provided as follows:
FIRST: I direct my Executor to pay all my just debts and funeral expenses as soon after my death as is practicable.
SECOND: All the rest, residue and remainder of my estate, real, personal and mixed and wheresoever situate of which I may die seized or possessed or to which I may be entitled at the time of my death, I give, devise and bequeath to my beloved wife CHARLOTTE LEVITON, to have and to hold the same absolutely and forever.
THIRD: I have made no bequests to my children knowing fully well that my wife will suitably provide for them.
FOURTH: I hereby nominate, constitute and appoint my beloved wife CHARLOTTE LEVITON, Testamentary Guardian of any children of mine who may be infants at the time of my death, and I request and direct that no bond or other security shall be required of her for the faithful performance of her duties as such Guardian.
FIFTH: I hereby nominate, constitute and appoint my cousin ISIDOR LEVITON, to be the sole Executor of this my last*300 Will and Testament, and I direct that no bond or other security shall be required of him for the faithful performance of his duties as such Executor.
*809 At some time subsequent to April 15, 1943 (shown on the estate tax return to have been on May 21, 1943), Isidor Leviton became the duly appointed, qualified, and acting executor of the decedent's estate under letters granted by the Surrogate's Court for Kings County. No entries appear on the records of that court with regard to any action taken therein with regard to the estate during the taxable years or subsequent thereto. No final accounting was ever filed by the executor and the court has never ordered his discharge as such executor. In lieu of any accounting to and discharge by the court, the executor obtained a general release signed by the petitioner, who was the sole legatee, releasing and discharging "Isidor Leviton, individually and as Executor of the Estate of David Leviton, Deceased" from all claims and demands whatsoever. This release was executed on July 14, 1948.
The value of the gross estate was shown by the estate tax return to have been $ 136,976.51 with deductions in the total amount of $ 54,873.86. *301 Among the assets of the estate listed in the estate tax return were 307,740 pounds of rags valued at $ 25,176.43, and the sum of $ 5,582 representing the value of "lease made by 123 Greene Street Corporation to decedent covering premises 121-123 Greene Street, New York City, for a term of 10 years from February 1, 1941, to January 31, 1951, at a rental of $ 8,000.00 per year and sublease from decedent to Empire Rayon Yarn Co. Inc., of the aforementioned premises for a period from February 1, 1941, to January 31, 1946. Value based on appraisal, copy of which is attached."
This appraisal reads as follows:
ALBERT D. KUBIE, being duly sworn, deposes and says:
1. I am a real estate broker and have been a real estate broker in the City of New York for the past 30 years.
2. I am familiar with the value of real property and leaseholds within the City of New York and within the vicinity of 121-123 Greene Street, in the Borough of Manhattan, City of New York.
3. I have examined the property aforementioned, which consists of a six story building, which is at least 50 years old and which building is outmoded. The entire neighborhood consists of similar buildings which are used primarily as cheap*302 manufacturing lofts.
4. I have appraised the lease between 123 Greene Street Corp. and David Leviton covering the aforementioned premises for a period of ten years from the 1st day of February 1941 to the 31st day of January, 1951 with respect to the unexpired portion of the said lease from April 15th, 1943 and I have similarly appraised the sublease of the aforementioned premises from David Leviton to Empire Rayon Yarn Co. Inc. The said sublease from David Leviton to the Empire Rayon Yarn Co. Inc., is for a period of five years from the 1st day of February, 1941 and the unexpired portion thereof consists of the period from April 15th, 1943 to the 31st day of January, 1946.
5. The true and correct value of the aforementioned lease and sublease is the sum of $ 5,582.00, based upon a rental valuation of $ 10,000.00 per year for the period from April 15th, 1943 to January 31st, 1946.
*810 6. The term of the lease between 123 Greene Street Corp., and David Leviton from February 1st, 1946 to January 31st, 1951 has no present value, as it is doubtful whether the premises can be let for the sum of $ 8,000.00 per year, which is the amount that David Leviton is required to pay under *303 the aforementioned lease.
Included in the deductions as a debt of decedent appears the following: "Item No. 16. Joseph Chasnoff, 4601-14th Avenue, Brooklyn, N. Y. due from decedent on alleged contract $ 11,000.00. This claim is disputed by the executor and is the subject of litigation in an action now pending in the Supreme Court, Kings County, by the aforementioned claimant against the executor."
In 1945 a deficiency in estate taxes was determined against the decedent's estate, which resulted in part from the disallowance of the deduction taken on account of the Chasnoff claim. This deficiency was paid by the executor.
In 1947, after considerable negotiations and investigations including the pretrial examination of witnesses, counsel for the executor arranged for the settlement of the Chasnoff claim for $ 3,250 which they recommended as in the best interests of the estate. This settlement was accomplished on June 25, 1947; and on June 30, 1947, a claim for refund of estate taxes predicated upon the partial payment of the Chasnoff debt was filed with the collector of internal revenue. This claim for refund was allowed in the sum of $ 615.50 plus interest in the amount of $ 102.67, *304 and a check in the sum of $ 718.17 was received by the executor on account of this refund in March 1948.
On December 1, 1947, the executor paid as legal fees to his attorney the sum of $ 5,000.
During his lifetime decedent was the owner of all of the stock of 123 Greene Street Corporation. In a manner not shown by the record petitioner obtained the ownership of this stock after decedent's death and was such owner during the taxable years. This stock was not included in decedent's gross estate. His estate tax return shows that he was the owner of a 50 per cent stock interest in Empire Rayon Yarn Co., Inc. Another person not related to petitioner or the decedent owned the remaining 50 per cent stock interest in that corporation.
At the time of his death decedent was the lessee from 123 Greene Street Corporation of premises known as 121-123 Greene Street, New York City, under a 10-year lease which expired on January 31, 1951, and which called for the payment of rent in the sum of $ 8,000 annually. He sublet these premises to Empire Rayon Yarn Co., Inc., hereinafter referred to as Empire, for a term of 5 years ended January 31, 1946, at an annual rental of $ 12,000. This sublease*305 was not renewed when it expired but the subtenant remained in possession of the premises as a statutory tenant, pursuant to the provisions of the New York Emergency Rent Law which protected it from dispossession provided *811 it paid the rental in force at the time the law was enacted, but under which it could vacate the premises at any time it desired, without liability. Empire remained in possession of the premises during 1947, but its stockholder who was not related to petitioner or decedent objected to the high differential between rental under decedent's lease and the rental required of Empire, and advocated the cancellation of the lease by 123 Greene Street Corporation to decedent and the execution of a new lease by the latter corporation to Empire. After some negotiations this proposal was acceded to by the executor and petitioner, and the lease between 123 Greene Street Corporation and decedent was canceled in the early part of 1948 and a new lease executed in which Empire was named as lessee. In March 1948 Empire paid to decedent's estate $ 3,000 as rent for the months of February, March, and April, 1948, and on the same date the decedent's estate paid to 123 Greene*306 Street Corporation $ 2,000 as rent for the same period. No other payment was made or received by the estate on account of such lease or the cancellation of the lease.
The 307,740 pounds of rags included in the gross estate at a valuation of $ 25,176.43 consisted of woolen clippings collected from clothing manufacturers by decedent, which he had sorted by color and grade and thereafter taped and wired and packaged in bales for sale to textile manufacturers. The price for which these rags or woolen clippings could be sold fluctuated according to the demand for such material on the part of the textile mills. At the beginning of the administration of decedent's estate in 1943 the offers made for these clippings were so low that the executor decided to liquidate them gradually, although this involved the expenses incident to their warehousing and insurance. In 1947 these expenses amounted to $ 944.65. The storage of these clippings for a long period of time also resulted in their deterioration and consequent loss of value. As of January 1, 1947, the executor had on hand and unsold an inventory of such clippings in an amount of $ 8,605.91 and, on January 1, 1948, an inventory of $ *307 2,736.40. These figures represented the original valuation put on the unsold clippings in 1943. In 1947 clippings appraised in 1943 at $ 5,869.51 and carried on the books of the estate as inventory at that figure were sold for $ 19.61. In April of 1948 Edlo Trading Company agreed to purchase all of the remainder of the rag clippings in the possession of the estate. Prior to that time monthly payments were made by the estate on account of the storage of these clippings in the amount of $ 57.50 each month. No payments were made by the estate on account of the storage of the clippings after April 1948. Payments were made to the estate by Edlo Trading Company on account of its purchase of these clippings as follows: April 9, 1948, $ 46.08; August 17, 1948, $ 1,960.30; and March 29, 1949, $ 2,611.90. *812 The record does not disclose the reason for the delay of Edlo Trading Company in making payments for the clippings after April 1948.
In 1947 the estate made the following distributions to petitioner:
| March 10 | $ 2,500 |
| April 8 | 1,200 |
| May 19 | 500 |
| July 23 | 2,000 |
| September 9 | 2,000 |
| November 19 | 500 |
These distributions were charged by the executor on the books of the *308 estate against principal.
During this year the estate received a net rental income of $ 333.33 a month; it received the $ 19.61 from the sale of rag clippings carried in its inventory at a value of $ 5,869.51 in two payments, one of $ 11.36 on February 10 and one of $ 8.25 on May 12; and on July 26 it received a dividend of $ 10,000 on some stock which decedent had owned at the time of his death. Disbursements of the estate charged against income for this year were made for storage rental on account of the clippings in monthly amounts totaling $ 690 for the year and for insurance premiums in the total amount of $ 254.65.
In addition to the distributions made by the estate in 1947 to petitioner and charged against the principal of the estate, the executor paid out and charged against principal the sum of $ 3,250 on June 19 in settlement of the Chasnoff claim and the sum of $ 5,000 on December 1 in payment of the fee charged by the attorney for the executor. The estate also paid on June 16, and charged to principal, taxes in the total amount of $ 245.75.
The period required by the executor of decedent's estate to perform the ordinary duties pertaining to the administration of the estate*309 ended in 1948, and the administration of the estate was completed in that year.
OPINION.
The first problem to be met in this proceeding is to ascertain the year in which the period of the administration of Leviton's estate was completed. We are not helped in this connection by the records of the State court in which the administration was conducted. No entries were made in such records during the taxable years, no accounting was ever filed therein, and there appears to have been no formal discharge of the executor and no formal closing of the administration of the estate by the State court. As we pointed out in Joseph M. Roebling, 18 T. C. 788, 794, the continuation of the administration of the estate over a considerable period was not under the direction and approval of a State court. Therefore the provisions of section 29.162-1, Regulations 111, are particularly appropriate *813 and we must determine from the record what is "the period required by the executor * * * to perform the ordinary duties pertaining to administration * * *."
Respondent contends that the period of administration ended during 1947, while the petitioner contends that *310 it lasted throughout 1949. We have determined from the evidence before us that the period of administration ended in 1948. It was in that year that the executor received the refund of estate taxes resulting from the settlement of the Chasnoff claim the year before, that the transactions incident to the leases were accomplished, and that a contract of sale was made covering the last relatively small asset of the estate, that is, the remainder of the rags. Moreover, we stress that it was in 1948 that the executor himself evidently considered the administration of the estate was ended, for it was in July of that year when a general release was obtained by him from petitioner which was considered by his counsel to be equivalent to the approval by the State court of an executor's final account.
Accordingly, the net income of the estate for 1948 became currently payable to petitioner and is taxable to her. Estate of W. G. Farrier, 15 T. C. 277. A fortiori, the net income reported by the estate in 1949, is taxable to petitioner as her own.
Respondent's contention that the net income of the estate for a year prior to the year in which administration ended*311 (which year under our holding above is 1947) would be income to petitioner under section 162 (c), because the distributions made to petitioner by the estate in such year were in excess of the estate's net income, must be rejected. In the instant case the decedent's will did not provide for the distribution of the current income of the estate to the legatee pending its administration; the distributions to petitioner were not made under order of the State court pursuant to any request of petitioner for the payment of the estate's income to her or otherwise; the distribution was charged by the executor aganst the principal of the estate; income taxes were paid by the executor on all of the net income of the estate without the taking of any deductions on account of the distributions to petitioner; and the payments to petitioner were in amounts and at times which bore no relation to the income earned and received by the estate. Under these circumstances we conclude that the distributions received by petitioner from the estate in 1947 did not constitute income of the estate which was properly paid to her and consequently taxable to her under the provisions of section 162 (c), Internal*312 Revenue Code of 1939. Anderson's Estate v. Commissioner, 126 F. 2d 46; Dunlop v. Commissioner, 165 F.2d 284">165 F. 2d 284. See Estate of Robert W. Harwood, 3 T.C. 1104">3 T. C. 1104.
A careful study of the recent case of Horace Greeley Hill, Jr., 24 T.C. 1133">24 T. C. 1133, indicates that it is in accord with this conclusion. *814 In that case the decedent's estate in administration had a net income in 1943 of $ 58,829.02. In the same year it distributed $ 70,932.92 to the legatees "of which $ 38,663.68 represented income earned in 1943." It appears that the balance of the distribution was designated as being from income of the estate in a prior year which had properly been treated as an accretion to the corpus of the estate. The Commissioner determined that the entire amount of the net income of the estate for 1943 ($ 58,829.02) was taxable to the legatees. Even though the payments made to the legatees by the estate in 1943 were in excess of the total net income of the estate for that year, only that part of the distributions to the legatees which was paid to them as income for*313 that year ($ 38,663.68) was held to be taxable income to them. With regard to the balance of the income of the estate for that year ($ 20,165.24) upon which income tax was paid by the estate, it was held not taxable to the legatees. While our discussion in that case centered on section 162 (b), we said: "And it is also clear that section 162 (c) can not be applicable since the income in question was not, in fact, paid or accrued to petitioners during the taxable years." Thus this case is a precedent to support the proposition that, where payments are made to legatees by an estate during the period of administration and the circumstances indicate that these payments do not represent, and are not intended to represent, the net income of the estate for the year in which the payments are made, they will not be taxable to the legatees under section 162 (c) even though the net income of the estate for the year in which the payments are made is in excess of the amounts of such payments.
Having held that the net income of the estate for 1948 is taxable to petitioner, it is necessary for us to consider the contention of petitioner that the amount of the net income of the estate reported*314 by it in that year and included by respondent in petitioner's income should be reduced on account of the amortization of, and loss on abandonment of, certain leasehold interests owned by the decedent. Specifically the contention of the petitioner on this point may be outlined as follows: The decedent at the time of his death in April 1943 was the lessee of certain property under a lease from 123 Greene Street Corporation which had at that time a remaining life of 7 years and 10 months and was the lessor of the same property under a sublease to Empire Rayon Yarn Co., Inc., which had at that time a remaining life of 2 years and 10 months; these leases were valued for estate tax purposes at $ 5,582, which amount represents their fair market value at the date of decedent's death and thus constitutes the executor's basis for depreciation and determining gain or loss; basing the depreciation rate on the life of the longer lease (under which the decedent was lessee) the annual depreciation allowable would be 12/94 of $ 5,582 or $ 797.43 *815 which would result in depreciation deductible in 1948 for the first 4 months of that year in the amount of $ 265.81; 1 and when this lease (under*315 which decedent was lessee) was surrendered in April 1948, the difference between the executor's basis ($ 5,582) and the amount of depreciation allowable to that date ($ 3,987.15) constituted a deductible business loss in the amount of $ 1,594.85. Therefore, petitioner contends the net income of the estate for the year 1948 included by respondent in petitioner's taxable income should be reduced by $ 1,860.65.
The fallacy in petitioner's contention lies in the assumption that the fair market value of the lease under which the decedent was lessee and which was surrendered in 1948 was the sum of $ 5,582. The only evidence as to such market value is an appraisal made of this lease and the shorter sublease expiring January 31, 1946, for estate tax purposes which we have set out in full in our findings. It is evident from this appraisal that, while it purports to value the lease and sublease together, only the sublease was considered to be valuable. After*316 January 31, 1946, the subtenant could vacate the premises without liability. Therefore, any allowable depreciation or amortization, and any loss, would be available to the estate only on account of the sublease and, in any event, not after January 31, 1946. Accordingly, the estate's net income for 1948 should not be reduced by allowances for depreciation or by any loss on abandonment in connection with the lease surrendered in that year.
In Docket No. 53920, a decision will be entered that there is no deficiency for the year 1947, and that there is a deficiency in petitioner's income tax for the year 1948, in the sum of $ 892.55.
In Docket No. 53921, decision will be entered for respondent.
Footnotes
1. The figures in this paragraph are taken from petitioner's brief.↩